The Internet of Things is advancing at a breakneck pace, with new innovations in almost every industry.

This is happening on two fronts: the transformation of “dumb” objects into data-driven smart machines, and the creation of wearable devices to monitor and manage the biological state of humans and animals.

These two areas are opening up major opportunities in efficiency and effectiveness. Utilizing mechanical devices to collect data and execute optimal solutions automatically (perhaps with an AI-human interface) unlocks substantial business value.

But, this new IoT device-plus-data paradigm creates a major commercial challenge: how do you price IoT offerings when they’re so transformational?

Data and Devices

Manufacturers who sell data-generating products such as smart tractors, sensors, windmills, machinery, software, location devices, etc. capture, package and resell data their products generate. The buyers may be the users of the product (selling the user’s data back to them), for example, a smart tractor or medical device. Or, the buyers may be third parties who use the data for another purpose.

Sensors, such as those developed in wearable devices for dairy cows, are a great example of a data-generating product. These collars, ear tags and implants monitor a cow’s movements and other biological signs continuously.

The data from each cow is used to benchmark its own behavior day-to-day and the herd as a whole. A cow’s movement can predict illness significantly before a farmer would visually notice the illness. Early detection means less-costly treatments and less use of antibiotics. The data can also be used to predict when a cow is going into heat, so she can be bred and put into milk production (this is highly valuable as missing this requires the dairy farmer to wait another month).

The traditional methods for detecting a cow’s health and reproduction were roughly 50 percent accurate and required significant daily human monitoring of the herd. With the new wearable technologies, these predictions can now be more than 80 percent accurate.

Data and Machines

Businesses create a vast amount of data in their day-to-day operations. Many firms are now packaging specific data they create in the course of their business and selling it to external buyers.

Agriculture is a great example. John Deere Precision Ag Technology and Case New Holland Advanced Farming Systems have developed and integrated IoT technologies into their tractors. These tractors are outfitted with a variety of sensors and data capture capabilities, interactive displays and software applications. These allow highly precise farming, resulting in improved crop yields and more successful farms.

Using GPS and visual tracking, the tractor knows exactly where it is and where it’s been year after year. Farmers can accurately map out where to plant seed, apply fertilizer and spray pesticide. The machine will execute and monitor its performance against optimal targets. Auto-guidance systems reduce row skips and overlaps, cut fuel and labor consumption and apply seed more regularly. Fertilizer use is lowered with sophisticated weed detection, allowing pinpoint spraying only where it’s needed. The vast amount of data generated can then be used to generate recommendations that improve planting, nurturing and harvesting operations.

Consumers accustomed to purchasing devices as standalone products, like tractors, may not understand how to value an ongoing subscription. Or they may expect the device for free — essentially “bundled” with the subscription. Consumers tend to prefer the simplicity of all-in pricing.

The Challenge of Pricing IoT Offerings

Enabling machines with smart IoT technology transforms the value offering. Instead of a pure product, you are now offering a combination of a product plus an ongoing subscription service.

This extends the length of the relationship with the buyer (generally for the better). However, it changes the way the buyer perceives value, and it can make commercial transactions more complex. In some cases, such as wearable devices for cows, the offering may be entirely new to the industry, requiring a significant mindset shift. These all create pricing challenges.

When somebody buys a tractor or a collar, it’s typically a “feature buy” — the customer purchases the features they’re looking for at an understandable price point. Sometimes the product comes with an additional warranty or recurring maintenance plan.

In comparison, IoT-enabled products include technology and service components that add ongoing value. The buyer may get greater efficiency, higher revenue, reduced costs, increased safety, etc.

These new benefits must be priced in relation to the value that the customer will derive from them. Getting to this information requires a higher level of collaboration with the customer to access the necessary data for value discovery.

There can be a structural business challenge to moving from pure product-based pricing to product-plus-service pricing. The financial and accounting standards for most heavy industries are based on financing products and asset depreciation over time. Adding subscription or service components to an equipment purchase can complicate the financing and have knock-on effects on pricing.

The Key to Pricing IoT Offers: Value Transition

One of the key concepts we focus on at Pricing Solutions is Value Transition. This means pricing a product, service or combination based on the level of utility it provides for a particular customer.

Pricing correctly involves assessing the three stages of utility from the buyer’s point of view. This is what we call Value Transition:

Monitoring: Devices can collect and monitor data.

Prediction: A smart algorithm can predict what might happen.

Prescription: A smarter algorithm can accurately prescribe what you should do to optimize your desired outcome.

The more of these elements your offer contains, the higher it should be priced.

A device that simply monitors for certain conditions would generally have less value than one which can accurately instruct you on which action is best to take.

Each element has a value associated with it. The cumulative effect of IoT offerings is typically greater than the sum of their parts. Pricing your IoT offer effectively means digging deep into the value it creates for your intended customers. You should segment your target market and assign a value to each step for each niche. This will effectively create a value map and identify any outliers that need a special pricing structure.

Pricing an IoT offering to drive the highest value to your company can be a complex challenge. This can be the difference between high ROI or a failed experiment in pushing new technology into an unreceptive market.